Sunday, November 1, 2015

Being a tango non-profit

Table of contents

  1. Summary
  2. The dance clubs used to operate under IRS Sec. 501(c)(7), what changed?
  3. Today, a typical dance club is a 501(C)(4) nonprofit. What is it supposed to do to comply with this designation?
  4. Being a state corporation helps
  5. Accounting and tax forms.
  6. State and local taxes
  7. Bylaws details


In the past, it seemed so logical for the social dance clubs to operate as "social clubs for members" (a 501(c)(7) nonprofit). The reality turned out to be a whole lot more complicated, with tons of burdensome rules which the IRS started to enforce. So a typical 2015 nonprofit dance club is chartered under a different IRS category, as an "organization promoting social welfare" (501(c)(4)). A "social-welfare" designation requires a club to concentrate on educational and community-empowerment activities. Organizing social dances becomes a secondary goal, and membership discounts are limited. But it isn't too hard to comply with the 501(c)(4) regulation, to minimize paperwork, and to stay tax-free.

The dance clubs used to operate under Sec. 501(c)(7), what changed?

The 501(c)(7) status requires the social functions (such as milongas) to be open only for members and their invited guests, rather than to the broader public (some dance clubs do operate like that, especially when their purpose is to provide social venues for the membership, rather than to teach, and to demo to, the general public). The biggest problem of the 501(c)(7) dance clubs was lax separation between income from admitting members and income from admitting guests - quite naturally, they just charged everybody admission! But in fact the moment a 501(c)(7) club receives more than 35% of its revenues from non-members, it's to lose its exempt status (A 501(c)(7) organization has to file an accounting with the IRS if more than 15% of its gross income derives from non-club-members. ) 

A 501(c)(7) may get around the nonmember income problem by framing admission fees as suggested donations, and then, if it is done carefully, it may not matter who donated, a member or a non-member ... but the IRS views the suggested donations schema as a dirty trick and tends to pay special attention to such claims. In 2006, the IRS cracked down at another practice of 501(c)(7) dance clubs - signing up guests as members right at the events. The problem was that membership in a 501(c)(7) must be restrictive, and when anybody from the street can just walk in and join the club right away, that's against the IRS rules (admittedly the member selection criteria may be as simple as having attended a class)

A San Diego club was instructed that their rules were too lax in that they didn't prevent guests from attending without an invitation from a member. Every visit by every guest must be documented in the books. That's a major paperwork hurdle. Even worse, a 501(c)(7) organization is not allowed promote its social events to the general public

A typical 2015 dance club is a 501(C)(4) nonprofit. What are we supposed to do to comply with this designation?

501(c)(4) is for organizations promoting social welfare of whole communities.

Under IRS Revenue ruling 66-221, a 501(c)(4) organization may conduct social activities such as dances, and may derive most of its income from such activities, if the purpose of these activities is to bring the community together and to raise funds for betterment of the community

However ruling 68-46 explains that if most of the club's expenses go towards venue rentals / paid staff / food / drinks for social activities, then it's inappropriate for a 501(c)(4) organization. Noncharitable purposes are OK for a 501(c)(4) - but only as long as they don't become its main purpose. By definition, socializing and recreational activities are _not_ social welfare and may be the means but never the ends of a 501(c)(4). But educating the broader public on how to do a specific activity better already becomes a social welfare role (Rul. 66-179). So it is a good idea to run educational workshops under the aegis of the club. Tango practicas / practilongas, milongas with included classes, festivals where admission includes classes, and educational shows also count as social-welfare activities.

Ruling 78-131 OK'd encouragement and development of public interest in a form of art as a worthy goal for  501(c)(4) organization - but the public was admitted for free to the respective art shows (although sales were made & commissions were charged). Basically it didn't matter that some money exchanged hands, because the broad goal of serving the community has been met by the show's community orientation and participation.(I read it as, "not limited to members", but they later explain that some services may even be limited to members as long as making this service available to a narrow group of people still benefits the community as a whole, for example when you train teachers or organizers).  (The art show organization in question was also helped by using volunteer effort, and by providing exhibition space free of charge for grade school students) So we may need to grant discounts to the disadvantaged, and/or to underscore the community work done for free.

Having a show where the participants pay a fee, where a fee is paid to a promoter, and/or where newsletters are supported by commercial ads, are generally contrary to "serving the community" as they are no different from conducting commercial business with the general public. Note that Ruling 67-109 allows charging nominal admission fees as needed to defray operational expenses. In Club Gaona. Inc. v. United States, 167 F. Supp. 741 (S.D. Ca. 1958), promotion of regular public dances qualified as social welfare, but the Club's downfall was its accumulation of massive funds which it then invested and lent out, rather than directed for community benefits (Gaona was a Mexican American club, unincorporated during much of its history, with operational expenses level at about 50% of the revenues, which they tried to justify by their sending gifts to the US servicemen, but it turned out to be a pittance). So we may prefer to show that our admission fees are not much higher than needed to defray operational expenses - hopefully not twice over the expenses.

Regarding the question of membership discounts: The IRS has provided guidance "that Membership in the organization is open to any interested person or business enterprise in the community and the benefits of its activities were extended to both members and nonmembers on equal terms." (Rev. Rul. 75-386) (but reserving some benefits to the members for the specific purpose of training and empowerment of community organizers and volunteers is OK). And giving free membership with a purchase of a discount card / coupon book should be OK too.

Also if a festival served the community by showcasing the history and traditions of this community, then it superseded the admission considerations (Ruling 68-224) Sounds like it may be a good idea to honor both local and ethnic cultural history at our events?

Open membership (w/o rejecting applicants) is a good sign. Providing scholarships not restricted to members lines up very well, too.

Unrelated business activities aren’t federally taxable if they are “not regular” (defined as occurring for specific windows of time during specific events, maybe a week or two in duration, once or twice a year). So perhaps a dance club may sell shoes or photographs or snacks during a special festival - or even at a county fair booth - without arguing if it is an activity related to its goals. But if the sales are occurring all year round then it must be “substantially related” to the purpose of the organization. A dance club wouldn’t be allowed to sell tulip bulbs all year around without taxation - it’s only OK on an infrequent / irregular basis. Selling merchandise with a club logo or accompanied by a booklet about the club activities might make almost any kind of business “related”.  Anything is substantially related to our purpose if it has a picture of tango on it! Technically unrelated activities, when run by the volunteers to generate funds for the organization, are also generally considered “related” - only having >15% paid staff (except incidental employees) is a disqualifier. Compensating volunteers for the actual out-of-pocket expenses is fine - just can’t compensate them for the time worked.

Of course more recently, there has been an outcry of condemnation of Section 501(c)(4) since it also covers such big political players as the NRA or the Sierra Club, which are allowed to lobby and campaign without disclosing donors. So who knows, perhaps the rules of the game will change again in not-so-distant future

Being a state corporation helps:
It is true that certain unincorporated associations can get federal tax exempt status. But, even unincorporated nonprofits still need to submit their bylaws / articles to the IRS when applying for the exempt status - and anything unincorporated won't shield its members from liability, too.

Accounting and tax forms.

Both 501(c)(4) and 501(c)(7) organizations had to file an accounting with the IRS if their gross income exceeded $25,000, but until 2008, the IRS didn't require any tax returns for nonprofits with smaller incomes. Then, the IRS set up a simplified electronic filing (990-N) for nonprofits with smaller incomes. The new form is simple - it just has a checkbox that your gross receipts are under $50,000 (as increased in 2010), and no more numbers - but the need to file something with the IRS made the smaller clubs more aware of possible mismatches between the IRS code designations and the actual club practices, accelerated the transitions from 501(c)(7)

State and local taxes

Sale taxes may still apply, depending on state rules, both for merchandise / food and sometimes also for the event tickets which include food or entertainment. There may be additional state restrictions on types of merchandise, locations and frequency of the events, etc. For example, in Utah, soliciting money / fundraising may require registration with the state which costs $75 annually, and only 501(c)(3)’s have blanket exemption from sales taxes. Admissions to dances and concerts (but not to the lessons or educational events) is subject to Utah sales tax. However, isolated or occasional sales in Utah aren’t taxable.

What needs to change in the bylaws to reflect a 501(c)(4) designation?

Many tango clubs bylaws contain vestiges of their 501(c)(7) history. They may need to be amended for better match their current 501(c)(4) status.

In particular, a Purpose Statement befitting 501(c)(4) should start approximately as follows:
Promote interest and involvement of the public in music, dancing, and culture of Argentine Tango in the [area/community] as a means of education, artistic fulfillment, socialization, recreation, and physical activity, by holding, hosting, sponsoring, organizing, and otherwise encouraging Argentine tango classes, practice sessions, workshops, demonstrations, and social events, and by collaborating with musicians and other dance organizations in joint projects designed to encourage the growth of Argentine tango dancing in the regional communities. Share listings in its newsletters and upon its website for instructors, educational and social opportunities to advance the development of the culture of Argentine Tango.

(Some recommend making a specific reference of the Section of the IRS Code we strive to operate under, as one of the purposes: "to qualify under section 501(c)(4) of the Internal Revenue Code"; it's also possible to add a reference that we ought to be bound by this section of the IRS Code in the contracts section. Our state further suggests adding “to engage in any lawful act or activity for which corporations may be organized under the Utah Revised Business Corporation Act

The criteria for membership: The only criteria should be payment of dues: open to any person upon payment of annual dues as established by the Board of Directors

Another interesting clause is in regard to disposition of assets. The more generic wording would be, “In the event that it becomes necessary to dissolve the corporation, any assets held by the corporation shall be distributed for one or more exempt purposes within the meaning of section 501(c) 4 of the Internal Revenue Code"

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